Seeking a loan with less than 20 percent saved for the down payment can require that you purchase private mortgage insurance (PMI). Based on the value of the home, PMI can add a great deal to your monthly payment and is something that you should consider before buying a home through your Realtor® or Movoto. This is not homeowners insurance and doesn’t cover your home. Private mortgage insurance covers the lender in the event that you default on the loan.
Lenders want their investment secured and a property on which they have up to a 100 percent liability requires protection of their assets. Once your property increases in value, due to either time, upgrades to the home or an addition you may be able to have the PMI removed from your loan. Some lenders offer 97 percent financing with no PMI but you must meet certain criteria to apply for these loans.
What is Private Mortgage insurance going to cost you?
That will depend on the size of the loan. Depending on your credit score and ability to repay the loan, the rate of private mortgage insurance can be from one-half of a percent to one and a half percent, per year, of the loan amount. With a loan of $250,000 and a PMI rate of one percent, you will add an extra $208 per month to your house payment. That is a considerable amount to add to a monthly mortgage payment. Knowing what is private mortgage insurance costs will help you determine what you can comfortably spend on a home.
How do you pay for Private Mortgage Insurance?
Although private mortgage insurance is most often paid by the month your lender can require that, it is paid up front, at closing. Other lenders can require a payment up front and monthly. Anyway it’s paid it will add to your monthly cost of owning a home and in the event you sell, you will not be able to get a refund on insurance that was paid for the life of the loan.
How do you decide if you want to pay PMI?
If you have found a house that you want to buy, you can decide if you are willing to pay the extra expense of PMI. You may need to pare your needs over your wants and buy a home that is less costly now that you know what is private mortgage insurance. If you want to reduce or eliminate this expense you must keep meet the loan to value ratio (LVR) of the appraised value of the home. There are ways to get what you want while reducing the overall cost of your home.
Your lender will work with you so that you know how much home you afford to buy and you can work from there to determine whether you want to save more money before buying or find an alternative loan. Keep in mind  loans with low down payment options have higher interest rates than loans with a 20 percent down payment. If you are willing to pay PMI and a higher interest rate to get the house you want, then do so but keep in mind that you are putting money in someone else’s pocket when you could be putting it in yours if you made a few different moves on the purchase of a home.
Will Private Mortgage Insurance last for the life of the Loan?
If you pay it up front, at closing then it will and if you sell, you will not be reimbursed. If you can you should have your lender set up monthly payments for your PMI so that when the value of your home increases about the threshold of for PMI you can have it discontinued because the equity that you have in your home will stand for the loan.
Do all loans require Private Mortgage Insurance?
No, they don’t. A few conventional loans offer a three percent down program with no PMI but you must meet certain criteria to obtain one of these loans. Loans through the Federal Housing Administration (FHA) only require a three percent down payment and many borrowers can easily meet the criteria for one of their loans. The loan is guaranteed by the U.S. Government so buyers will not have to incur the cost of PMI with an FHA loan.
If you are a qualified Veteran then home loans through the Veteran’s Administration (VA) offer low down payment loans that guarantee the loan with no added cost to you. Available for first time homebuyers and those who are trading up a VA loan may be the way to go if you qualify.
Another low down payment, guaranteed loan is focused on the needs of those in rural areas of the country. The U.S. Department of Agriculture, rural development loans gives many homeowners the chance to get into a home, affordably. Available to those who may not qualify for other loans, a rural development loan is worth your consideration if you live in any of these areas.
Are you willing to pay the cost of PMI?
Sometimes opportunities come along that require your immediate attention. If you find the perfect house at the right price, you will probably be willing to pay a little more every month for it to be yours. Having the opportunity to buy with less than a 20 percent down payment is the only way many first time homebuyers are able to purchase a home and combining PMI with that low down payment makes this possible.
2 Point Highlight
Private mortgage insurance covers the lender in the event that you default on your loan.
Although private mortgage insurance is most often paid by the month your lender can require that, it is paid up front, at closing.
